Madoff Scandal Could Spark New Regulations

In the wake of the <"">Bernard Madoff and <"">Arthur Nadel scandals, and issues over AIG and GM debacles, to name some, government regulators are working to increase investor protection. The Sarasota Herald Tribune notes that while the changes will do little to help those already hurt by the numerous financial catastrophes and frauds that have plagued the country in recent months, the new administration is hoping to make broad changes, considered the most extensive since early last century.

The U.S. Securities and Exchange Commission

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(SEC) is hoping to compel the majority of investment advisers to accept surprise exams administered by external auditors, said the Herald Tribune. According to Mary Schapiro, SEC Chairman, the proposals are in response to the historic Madoff scandal that decimated scores of investor portfolios, as well as other frauds that have been revealed in the current economic downturn, said the Herald Tribune. “Investor confidence has been shaken,” Schapiro said, quoted the Herald Tribune.

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Madoff pleaded guilty to 11 fraud counts on March 12. The former chairman of the NASDAQ stock exchange ran an investment advisory business for decades that was, in reality, a Ponzi scheme. Last November, Madoff told his investors his fund held over $64 billion, but in reality, it only held a mere fraction of that amount. Because Madoff’s Ponzi scheme went on for decades, it is suspected that he was far from the only person in his circle who knew of the swindle. It’s known that several people close to Madoff—including key employees, as well as his wife, sons, and brother—were among those close to him caught up in the probe.

Disbarred attorney, Nadel—who was neither a licensed stockbroker nor an investment advisor–was president of Sarasota-based hedge fund management firm Scoop Management. Nadel reportedly told his 350 investors that his funds held $360 million, but in truth, they only held around $125,000. Nadel disappeared on January 14, a day before he was to deliver a $50 million payout to investors. He left his family a purported suicide note, but it was always suspected that Nadel was alive and on the run. Nadel turned himself in to the FBI in Tampa in late January, has been unable to post a $5 million bond, is currently being held at the Manhattan Correctional Center, and was recently indicted on 15 fraud counts.

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Today, hedge funds manage an astounding $1.4 trillion in assets, a marked increase in the past two decades from $38 billion. Treasury Secretary Timothy Geithner looking for increased power over hedge funds, which are only minimally regulated, said the Herald Tribune. President Obama’s administration feels hedge funds have increased to the point where they are now too massive to operate without government intervention.

Charlie Wilson’s War release Many fault the SEC for the myriad financial catastrophes; however, under its new leadership, said the Herald Tribune it has ordered nearly 300 investigations since the start of the year, an increase of 32 percent over last year. The SEC might be charged with ensuring investment managers “entrust client funds to independent third parties,” said the Herald Tribune, adding that surprise exams would occur once yearly and be applicable to nearly 10,000 of the 11,000 registered SEC advisors.

Also, under the proposals, “hedge funds, private-equity firms, and derivatives markets” would have to register with the SEC and “disclose trading positions to regulators,” said the Herald Tribune, regulations against which hedge fund operators have long fought.

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